Encore Wire Corp (WIRE) 2009 Q3 法說會逐字稿

Hello and welcome to today's Encore Wire Third Quarter Conference Call. As a reminder, all lines will be on listen-only mode and there will be time for Q and A at the end of the call. (Operator Instructions).

I will now turn the call over to Mr. Daniel Jones, President. Go ahead please.

Thank you, Lisa. Good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly earnings conference call. I'm Daniel Jones, the President and Chief Executive Officer of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer.

The slow down in construction activity in the United States continues to impact our industry adversely, as it has over the last three years, and commercial construction has been slowing since the beginning of 2008. Unit volume decreases have affected our industry and created a volatile pricing environment that compressed the spread between what we paid for a pound of copper versus what we were able to charge for wire that contained a pound of copper.

In the third quarter of 2009 the spread fell by 24.3% versus the third quarter of 2008 and it fell by 19.6% for the first nine months of 2009 versus the first nine months of 2008. We attempted to lead the industry with several price increases during the quarter but met limited success, as the average spread remained almost unchanged on a sequential quarter basis.

The fact that we have managed to post breakeven results in this difficult environment is due to our low cost business model and aggressive cost cutting in all facets of our operation. Our staff has worked diligently to control cost effectively while maintaining the service level to our customers Encore is known for.

Our reps in the field tell us the volatility of copper over the last year, coupled with declining industry volumes, has caused many of our distributor customers to lean down their inventory levels. The low inventory levels in the distribution chain make Encore's excellent order fill rates valuable to customers who are gravitating towards the just-in-time inventory. We believe our volume decreases are less than the total industry and we believe we are able to get a slight premium for our excellent service level from customers who realize they are saving money by buying from us.

Despite our desire and efforts to do better, our performance is impressive in this economy and we thank our employees and associates for their tremendous efforts. We also thank our shareholders for their continued support. Frank?

Thank you, Daniel. In a minute we will review Encore's financial results for the quarter. After the financial review we will take any questions you may have.

Each of you should have received a copy of Encore's Press Release covering Encore's financial results. This Release is available on the Internet or you can call Denise Liss at 800-962-9473 and we will get you a copy.

Before we review financials let me indicate that, in these initial comments and in the question and answer period that follows, we may make certain statements that might be considered to be forward looking. In order to comply with certain securities legislation and instead of attempting to identify each particular statement as forward looking, we advise you that all such statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed today.

I refer each of you to the Company's SEC reports and news releases for a more detailed discussion of these risks and uncertainties. Also, reconciliation of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP including EBITDA, which we believe to be useful supplemental information for investors, are posted on www.encorewire.com.

Now the financial results, net sales for the third quarter ended September 30th, 2009 were $168.7 million compared to $296.3 million during the third quarter of 2008. Lower prices for building wire sold in the quarter ended September 30th, 2009 accounted for much of the decrease in net sales dollars, declining 25.1% per copper pound sold versus the same period in 2008.

Unit sales in the third quarter of 2009 decreased 24% versus the third quarter of 2008. Sales prices fell primarily due to lower copper prices and building wire industry competition.

Net income for the third quarter of 2009 was $300,000 versus $8.1 million in the third quarter of 2008. Fully diluted net earnings per common share were $0.01 in the third quarter of 2009 versus $0.34 in the third quarter of 2008.

Net sales for the nine months ended September 30th, 2009 were $472.5 million compared to $900.9 million during the same period in '08. Lower prices for building wires sold again in the nine months ended September 30th, 2009 accounted for most of the decrease in net sales dollars declining 37.4% versus the same period in 2008.

Unit volume in the nine months ended September 30th, 2009 decreased 16.3% versus the same period in 2008.

Net income for the nine months ended September 30th, 2009 was $5.5 million versus $23 million in the same period of 2008.

Fully diluted net earnings per common share were $0.24 for the nine months ended September 30th, 2009 versus $0.98 in the same period in 2008.

On a sequential quarter comparison, net sales for the third quarter of 2009 were $168.7 million versus $159.4 million during the second quarter of 2009. Unit volume decreased 9.2% on a sequential quarter comparison.

Net income for the third quarter of 2009 was $300,000 versus $600,000 in the second quarter of 2009. Fully diluted net income per common share was $0.01 in the third quarter of 2009 versus $0.03 in the second quarter of 2009.

As usual, the real story behind our earnings fluctuation is the spread between what we paid for a pound of copper versus what we were able to charge for wire that contained a pound of copper. As Daniel highlighted earlier, our spreads were down year-over-year and virtually flat on a sequential quarterly comparison.

Informed investors, who have followed us for some time and understand the dynamics of this business, have always focused on the spread as the key driver of our earnings and understand that LIFO adjustments are consistently applied under GAAP. LIFO merely serves to bring the latest cost of materials into the statements and allows these spreads to be accurately included in our results.

Our low-cost structure continues to enable us to produce earnings in these turbulent times. We continue to maintain our strong balance sheet. The only long-term debt we have as of September 30th, 2009 is $100 million in long-term notes due in 2011 with our $150 million revolving line of credit at a zero balance. In addition, we had $213.6 million in cash as of September 30th, 2009. We also declared our 12th consecutive quarterly cash dividend during the third quarter of 2009.

We want everyone to note that this conference call will be available for replay after the conclusion of this session. If you wish to hear the taped replay please call 866-206-0173 and enter the conference reference 248150 and the pound sign.

I'll now turn the floor back over to Daniel Jones, our President and CEO. Daniel?

Thank you, Frank. Lisa, we'll now take questions from our listeners.

(Operator Instructions). Our first question comes from [Tom Brushara]. Go ahead please.

How does the competitive environment look with the economy the way it is? Is it possible that the balance sheets of some of the other members in the industry might be challenged and in the process Encore may pick up additional market share?

The first part of the question, it's hard to gage what the other guy's balance sheets look like only because they're private, but I would guess they're in similar shape or something in the range of what we've done in the past quarter but also, the second part of your question would be the market share. We feel like we're doing the right things and sticking to our disciplines in the market that when it turns and we've seen a few signs here and there from month-to-month type numbers, but we think we're ready to go whenever it comes back.

The challenge that we have and what we continue to push in the operations side is to keep our cost as low as possible so that we can weather the storm.

Very good, thank you, Daniel.

(Operator Instructions). Our next question comes from Liam Burke.

Thank you. Good morning, Daniel; morning, Frank. Daniel, could you give us a sense either of volume declines or capacity utilization of how each of the general business split between residence and commercial construction stand?

Well, internally or as an industry?

No, internally.

We're running about 70% commercial and about 30% residential.

Okay and in terms of volumes, how are they doing by commercial and residential?

Yeah, well would you like nine months to nine months? I can give you that.

Sure.

It's right here. The volumes for residential are still going down a lot more than the commercial. Year-over-year the residential is down almost 42%. The commercial volumes are down 7% nine months through nine months and what we saw on the residential side was in the fourth quarter of last year it kind of hit a plateau and we've been at that plateau now for four straight quarters. And whether that holds there or starts to climb back up remains to be seen.

Great thanks, Frank. And, Daniel, you mentioned seeing pockets of stability I guess, or could you give us a sense whether it's a geography or line of business that's showing some, I guess for lack of better word, stability?

You know, geographically there are some spots, Liam, that seem to -- were hit harder earlier that seem to be -- the business has come back somewhat, not like it was obviously but the orders are more regular. They seem to be a little more consistent in size even through they are significantly smaller than they were in the past. There are some geographical spots and, as far as actual markets themselves, in the residential product and the areas geographically that the stability seems to be a little more frequent. You know, it'll fool you. You'll go for a month and think man it's going along pretty well in an area and then the next week it's like someone flipped a switch off. But overall it's more geared in the residential side and it's pretty sporadic but there are some geographic spots that seem to be heading the right direction.

Thank you.

Keith Johnson has the next question.

Just a couple quick questions, I believe you made the comment earlier that sequentially volumes or total volumes declined about 9.2% from Q2 to Q3 this year.

That's right.

Could I get that or could you break that on a residential and a kind of a commercial basis?

Well, and again these are small increments in terms of total units, but on a sequential basis actually residential units were up 8% and commercial units were down 13% and whether that's the beginning of a trend or not, again as I indicated, remains to be seen.

And that fits, Keith. That fits in line with Liam's question and our answer. There's pockets out there that we've been able to identify and the residential seems to be heading the right direction.

And just, kind of as a refresher, the wire product of course comes in at the mid stage I guess of the construction cycle of a house so you -- I guess as we look at starts out there stabilizing coming through the summer actually maybe sequentially showing some improvement, a little bit of a lag there to how it should start affecting the demand for wire and cable?

Well, you would think so. I mean, that would be intuitive obviously but it's not only the single-family housing starts. The product that we consider to be residential would actually go into four, maybe five, different residential products, would single-family, multi-family and they continue so it's not only the single-family start number that you see in the paper.

Any of those showing more strength or those five kind of groups showing more strength than another one?

You know, not really. From one week to the next or from one day to the next you might see some strength or -- but over time it kind of evens out and it, again, the up 8% number, 8% of the total is still not a big number but it is a positive sign.

Right okay. How should, as I look into 2010 think from a stimulus spending standpoint as more of that money enters into the construction markets, how are you guys looking at that as the potential benefit to kind of help offset some of the headwinds on the commercial side?

We try to not get too excited or too down either way on the promises that we hear but specifically it would be for us tied to the banks loaning out money. As the money starts to flow a little bit more freely or starts to flow at all on new construction projects, that's when we'll get a little more excited but I just don't have the data to suggest that the stimulus money is tied specifically to any positive or negative numbers at this point.

Okay your -- I guess your manufacture reps out there cut it on the ground so to speak or they're still kind of waiting to see or more excited or less excited maybe as they look ahead related to stimulus?

There are still some categories that, Keith, that never really died, hospitals and schools and some government structures and so forth still is the leader on the commercial side and I think probably all three categories would benefit from stimulus money but specifically to tie that to a timing or a point in time or a stake in the ground or however you would describe it, that's the part that we're set and ready to go with.

When it happens we're ready to go and the feedback from the sales reps that are on the street everyone seems to be ready to go. The distributors are ready to go, the customer distributors. The sales reps are working as hard or harder than they ever have. Our demands on them are a little bit stronger now but you know, again, as far as exactly the perfect timing we don't have a real specific date to go to.

Okay right, thanks a lot.

Robert Kelly.

The question I had with copper rising to the level where it is is the response from your competitors to kind of cut back service levels or do they, in fact, get kind of more desperate with their pricing? How does that kind of flow through the summer?

Well, you know, copper has doubled since late last year and historically that's been a fantastic situation for our industry. The change this time around on the copper clime has been there's a competitor that's been very public with they don't agree with passing on those costs because they feel like the demand won't allow it.

You know, our approach to that is you pass it on and it is what it is regardless of the demand. It's very transparent for contractors and distributors alike to see that copper is up $0.10 or down $0.05 or whatever the volatility would lead to and for my 20 years that's copper is the deciding factor on a price increase or actually price decreases as well. You can have PVC. You can have freight. You can have nylon. You can have other cost influences but until copper trends one way or the other the price increases typically fell.

This situation is different because, again, we have a competitor that's been very public with they don't believe in that only because demand is down. So when you have copper trending, as we have, to pass it on has historically been a real simple equation and, as you can see going back in time, when demand is strong and copper is going in the right direction it's a great thing. When we have demand a little soft and copper going up, again, we have folks that depend on volume and believe that they should shove so many pounds into the marketplace or what have you, it's a little harder to get those price increases through and stay ahead of the copper increase.

[Brian Qualcheck].

Thank you for taking my questions. Congratulations on maintaining profitability in a tough environment, speaks as to your skill as operators. Just a couple of holes I want to fill in the model, you talked about volumes on a year-to-date basis but I am wondering if you can help me with year-over-year comparisons on volumes for the Q3 period on both residential and commercial.

And you want to know the percentage change Q3 to Q3?

Yes please.

Q3 to Q3 residential is down 42% and commercial is down 17%.

And I think you mentioned in the Press Release I heard Daniel say in the script that the spreads were relatively flat quarter-over-quarter. How about pricing quarter-over-quarter?

The spread was flat so we maintained ourselves on the same page, was flat on sequential quarters and so if that's what you're asking the pricing, the average price that we shipped from Q2 of '09 to Q3 of '09, was up 16%.

That's exactly the period that I am looking for. And just a housekeeping item, cash flow from ops and CapEx during the quarter?

During Q3 the cash flow from operations was a negative $18.7 million, primarily due to rises in receivables of almost $12 million and inventories, specifically in prepaid copper, of $17 million. Everything else was positive and then CapEx for the quarter was $3.7 million.

What did the budget for '09 look like for CapEx? I think you've given some guidance as to that before and maybe can you give us a look at what '010 looks like on the CapEx line?

Well, CapEx for '09 year-to-date is at $19.7 million and we are projecting at the moment that it will come in at around $22 million for '09. Now, as far as '010 goes--

We've got a couple of projects that we're working on right now, Brian, and depending on where those come in timing wise we're looking about the same in '10 as it was in '09.

Got you. That's all I've got. Keep up the good fight.

Thank you, sir.

(Operator Instructions). We have no more questions at this time.

Lisa and ladies and gentlemen and [Jimmy Warshire], thank you guys very much for calling in and we look forward to speaking to you again and thank you for your support.

Thank you very much, ladies and gentlemen. This conference is concluded.